THE Global Justice Movement Website

Friday, October 29, 2010

This morning Richard Foley sent us an article from the Christian Science Monitor, "Is the U.S. System Rigged for the Rich?" by David R. Francis. We have to pay attention to Richard on several counts. One, he's a railroader, and so were my grandfather and great-grandfather — almost a full century of service with the AT&SF, the Needles to Kingman run (and back again, of course). My grandfather and great-ditto, not Richard. Two, he's a long-time CESJ supporter. Three, he's a railroader. Anyway, to answer the question raised by the article, "Yes. The U.S. system is rigged for the rich. For our own good, of course."

This injustice is based on a fundamental dogma of all three mainstream schools of economics, but especially the Keynesian. It is an assumption disproved by Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, in his book, The Formation of Capital (1935). (Don't stop me if you've heard this. The more often we repeat it, the more chance that you will internalize it and pass it on to others — especially when opening doors.)

The assumption that causes so much injustice is that new capital cannot be financed without first cutting consumption, accumulating money savings, and then investing. This requires a class of people who can afford to cut consumption: the rich — and the richer, the better, due to the high cost of advancing technology. Wage earners cannot afford to cut consumption, therefore (according to Keynes) should not own. Check it out. It's right there in the closing passages of Keynes's General Theory of Employment, Interest, and Money (1936).

Under the "past savings" assumption, if the State wishes to foster new capital formation and thus job creation, it must make it as advantageous as possible for the rich to save, or (so the reasoning goes) there will be no new capital formed, and thus no jobs. In the eyes of today's academics and policymakers, social programs for the poor, while wrongly implemented as a permanent solution to poverty, are construed as if they were short term helps on the way to getting jobs that won't exist unless the rich get enough money to invest — the presumed long term solution.

Unfortunately, to fund job creation, the State has to give back or not take in the first place money from the rich, and make up any perceived slack with subsidies and other "corporate welfare." The poor necessarily take second place to the perceived need for the State to subsidize job creation . . . ostensibly to help the poor, but with advancing technology, fewer and fewer jobs are created, even in periods of rapid growth.

From the perspective of Binary Economics, this is all nuts, but it gets worse.

According to Keynes, the "forced savings" to finance new capital formation doesn't come from the rich, but from wage earners. The government inflates the currency to bring down unemployment . . . but this raises the price level, forcing wage earners to pay more for fewer goods and services. This meets the Keynesian definition of saving, but the benefit does not go to those who are forced to cut consumption, but to producers who realize greater profits for less production. Under Keynesian monetary and fiscal policy, the poor are robbed for the benefit of the rich.

It's even worse than that. Yesterday Reuters pointed out that American companies have accumulated an estimated $1 trillion in cash — half the estimated annual capital growth ring. According to Reuters, this will not be paid out in dividends, as the rights of property demand, nor will it be used to expand plant and equipment, hire new workers, or pay bonuses or additional compensation to existing workers. Instead, the plan is to buy back shares, "going private." This will further concentrate capital ownership by between 3-5%, a very crude estimate. This doesn't sound like much, but add that to the $2 trillion or so of new capital typically created each year and financed in ways that create few, if any new owners, and you have capital ownership concentrating at a rate of 10% or more each year.

If this were an algebraic progression, all wealth would be concentrated in a tiny percentage of owners within a decade, but (small comfort) it's calculus, not algebra — it doesn't go 10% of the original total each year, but 10% of the remaining total, a curve, not a straight line.

Kelso and Adler were absolutely correct in the subtitle of their second book when they called this "the slavery of [past] savings." Not only is the financial system itself set up to concentrate ownership, the State is forced under Keynesian assumptions not only to facilitate this concentration, but accelerate it as fast as possible, just as Keynes asserted in his General Theory and his call for socialization of the economy — to "protect" the poor, the State must allow the rich to accumulate faster and faster, even to the extent of robbing the poor, but the State then steps in and tries to take care of the poor so that they don't suffer too much. The State cannot, however, afford to give the poor as much as it gives the rich, or the whole process is as meaningless as Keynesian economics itself. Keynesian economics permits private "ownership," but only if that ownership is meaningless.

The answer, of course, is Capital Homesteading — but we first have to convince people that, even in today's economy, existing accumulations of savings are rarely used to finance new capital formation in any event — I can prove it to an accountant in minutes, but most people aren't accountants, and most accountants don't care. (In a corporation, "savings" are called "retained earnings." You do not, however, decrease retained earnings when purchasing new capital. Instead, you increase liabilities, or decrease one asset account and increase another; it always has to balance. The only legitimate charge against retained earnings is dividends, not new capital assets. Savings, therefore, are never used directly to purchase new capital. It can't be done.)

Obviously, the sooner we can get the powers-that-be to understand this, the better off all of us are going to be. That means that YOU (not the guy behind the tree) are personally and individually responsible to organize with others and open doors for us to get the word to prime movers. Consequently, here's what we've been doing this week:

• Our "Halloween Horror Special" series of postings has come to an end. Oddly enough, for pieces that were a little bit to the side of serious, they proved to be, for this blog, immensely popular. Readership has tripled while the series has been running. The problem, of course, is that this stuff is so serious and complex that it's difficult to sustain even the rather moderate humor we tried to insert into the postings. • The big news, of course, is Norman Kurland's trip to China to participate in the Caux Roundtable on ethics in business in Beijing. We'll try to get Norm to submit a full report to expand on what little we have space for here in these news briefs, but the bottom line is that the Chinese scholars seemed extremely interested in what Norm had to say. He was able to distribute copies of all of CESJ's major publications, Curing World Poverty (1994), Capital Homesteading for Every Citizen (2004), Supporting Life (2010) and our most important reprint to date, Dr. Harold G. Moulton's The Formation of Capital, the classic from 1935, but with our 2010 foreword tying Moulton's work into Kelso and Adler. Moulton's work undermines the basic premise of both socialism and capitalism — the alleged necessity of concentrated ownership (whether public or private) of the means of production in order to generate the savings to finance new capital formation — while that of Kelso and Adler shows how each person can benefit directly from ownership financed out of future savings. Capital Homesteading, of course, details a comprehensive program for achieving this end, and Supporting Life ties it into an issue that many people put at the top of their priority list. • Reverend Virgil Wood, a veteran of the civil rights struggle and one of Martin Luther King, Jr.'s key men, has been making great strides in opening doors for Norm with some of the legends of the civil rights movement. It now appears highly likely that Virgil will succeed in getting Norm a series of meetings with some very well placed individuals who may be able to get Norm to Obama. • Earlier today a meeting was held to plan for the upcoming annual rally at the Federal Reserve. Participants renewed their commitment to open doors to prime movers who could bring people to the rally and even provide logistical support for the effort. • Given the lack of resources, the publications program is proceeding very well. We have at least eight additional books that we could get out sooner if we had the resources. We are investigating some of the internet marketing and social media techniques to publicize the new books, especially The Formation of Capital, and may be in a position for a great leap forward by the end of this calendar year. • As of this morning, we have had visitors from 48 different countries and 49 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Brazil and Australia. People in Trinidad and Tobago, Venezuela, Lithuania, the United States, and Belgium spent the most average time on the blog. The most popular posting is "I Do Believe in Spooks" in the current Halloween Horror series, followed by "The New Manifest Destiny," an old posting from 2009 "We are Seeing the Future and It Doesn't Work," "The Keynesian Bloodletting," and "The Severed Hand of Adam Smith."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, October 28, 2010

In Dublin on Monday, April 24, 1916, forces of the Irish Republican Brotherhood and the Irish Citizen Army, supported by 200 members of Cumann na nBan (League of Women) occupied the General Post Office on Sackville Street, later renamed O'Connell Street in honor of the Great Emancipator, proclaiming an Irish Republic. After fighting that lasted a week, the rebels surrendered. They were imprisoned, and all of the leaders with the exception of Eamon de Valera, technically still an American citizen, were tried and executed in secret.

A critical provision of the proclamation, read before entering the General Post Office, was to assert the importance of ownership as the basis of the indefeasible sovereignty and independence of every Irish man and woman:

We declare the right of the people of Ireland to the ownership of Ireland, and to the unfettered control of Irish destinies, to be sovereign and indefeasible. The long usurpation of that right by a foreign people and government has not extinguished the right, nor can it ever be extinguished except by the destruction of the Irish people.

Today, the effective exercise of the natural right of the people of Ireland to the ownership of Ireland, while no less sacred now than then, is even more remote and less attainable than it was immediately preceding the sacrifice of Éirí Amach na Cásca, the Easter Rebellion. The size of the current deficit — 22% of GDP — dwarfs in relative size even the deficits incurred by the other "PIIGS." It is an incredible tsunami of debt that, under existing financial and economic assumptions, can only result in the economic destruction of the Irish people.

There is, however, hope — and a way of getting out of what threatens to be a disaster unequaled in scope for a century and a half, not since An Gorta Mór, "The Great Hunger," before which even the worst possibilities presented by today's impending financial catastrophe pales into insignificance.

There are, nevertheless, lessons to be learned from the Hunger, even if there is otherwise no possible comparison. The most obvious is that the Famine was completely avoidable, and would have been, had the great mass of Irish men and women been direct owners of the land. More than enough food was produced in Ireland to keep everyone alive and comfortable during even Black 47, the worst year of the Famine, but it was exported in payment of debt (usually incurred at the gaming tables of London and Paris) and to provide income for absentee landlords.

Today's financial disaster was also completely avoidable:

• Had the Bank of Ireland discounted and rediscounted loans to fund financially feasible and properly vetted capital projects instead of engaging in open market operations to purchase government debt securities and finance gambling on the stock market, the deficit would necessarily have been limited to existing accumulations of savings, whether domestic or lured in from abroad. • Had such credit been extended in ways that made every Irish man, woman, and child, instead of the government and foreign investors, a direct owner of the agricultural, infrastructural, industrial and commercial assets of Ireland, the income generated by that ownership would first have paid for its democratic acquisition, then provided a "second income" to supplement and, in some cases, replace wage income. • Had financing for new capital formation come from the expansion of commercial bank credit, the income from capital would have generated sufficient effective demand to keep the economy on an even keel while the banking system provided adequate financing for any feasible capital project, whether agricultural, commercial, or industrial.

Instead, the financial resources of the nation were expended on increasing the size of government, taking away the personal sovereignty of each Irish citizen to the extent that the government took over, and driving the country to the brink of ruin.

A way out?

Yes!

• Pass enabling legislation to create a "Irish National Citizens Land Bank" to take immediate title at no cost to all government-owned land, natural resources, and infrastructure. Every Irish citizen and legal resident of the country would immediately receive one no-cost, non-transferable, voting and fully participating equity share in the INCLB, making the declaration in the Easter Proclamation a reality. • The use of all land and natural resources held by the INCLB would be determined by an elected central authority, located outside of Dublin (possibly Meath) with mandatory input from local, county, and provincial authorities. Existing shares in the INCLB would be surrendered without compensation at death or on immigration, and new shares issued at birth or on declaration of permanent resident status. • The INCLB would acquire additional land, natural resources, and infrastructure at fair market value when it came on the market, exercising a right of first refusal for all such offerings. • Financing for acquisitions would come from discounting loans for the purchase at the Bank of Ireland. • All income from leasing and usage fees above the costs of administering the INCLB would be distributed to shareholders as a dividend, to be taxed as regular income. • Pass legislation to establish "Homeowners Equity Corporations" as a way to solve the housing crisis. • Reform the commercial and central banking system to prohibit government borrowing and discourage non-productive private sector borrowing, especially for stock market speculation, except out of existing accumulations of savings. • Reform the tax system to encourage wealth accumulation and a more just distribution of the costs of government. • Implement a program of "Capital Homesteading."

These and other steps can be taken almost immediately. With the rise in economic growth in which everyone, not just a few participate, the deficit can be reduced dramatically as people take back the economy from the government, and start to take care of their own needs out of their own incomes.

More than fifteen centuries ago the Irish saved civilization. It's time to do it again.

Yesterday we promised a final blowout for the final posting in the "Halloween Horror Special" series. Well . . . the subject matter certainly fits, but the treatment may not be up to our usual incredibly high standards. The fact is that we have to get to work on another posting we hope to make today and try to get some people and organizations moving on the Just Third Way. So, here goes for our final episode of our version of the Tree House of Horrors.
It's not a coincidence that the typical American idea of the haunted house is a late Victorian mansion. As a result of the home mortgage crisis caused by the Panic of 1893 and the ensuing Great Depression (Part I), many people abandoned the over-priced homes they had purchased or built. Their mortgages exceeded the market value of the home, and it was much easier in those days simply to walk away from an unpayable debt, disappearing into another state without leaving any clues to your whereabouts. Consequently, banks and mortgage companies foreclosed on properties that they couldn't sell, and which were left to fall into ruin. This provided generations of children and village idiots with dares to spend the night in the house from which the owners had mysteriously disappeared without leaving a trace, and the stories made up to explain it . . .

It took, however, the Panic of 1907, to which the Panic of 1893 inevitably led, to wake people up to the need for genuine reform in the financial system. The president of the Knickerbocker Bank and Trust, the third largest bank in New York, used the bank's resources (reserves) to try and "corner" copper. It almost worked, but "almost" doesn't count when you're up against J. P. Morgan. The Knickerbocker went bust, and runs ensued on the banks in New York, a panic that quickly spread across the U.S. and Europe.

The demand for reform was immediate and overwhelming. One of the most critical reforms, finally embodied in Glass-Steagall a generation later, was to separate commercial and investment banking. Separating commercial from investment banking effectively prohibited commercial banks from using their assets to invest (or speculate) in corporate shares or securities of other companies. All that, of course, changed with the repeal of Glass-Stegall.

Who said that those who fail to learn from history are doomed to repeat it? It doesn't matter, because the truth of the aphorism is evident. The home mortgage crisis that accompanied the Panic of 1893 was repeated with the sub-prime mortgage crisis of 2007 — ironically an even 100 years following the Panic of 1907 that finally provided the incentive for genuine reform of the financial system . . . carefully dismantled beginning in the 1980s.

And what followed the home mortgage crisis? Genuine reform to institute proper internal controls of the financial system? Hardly. The financial and political powers-that-be immediately went to work replacing even more internal controls with questionable external regulation with no bite — bulldogs with rubber teeth, and blind in both eyes.

They also, welche wonne!, insisted on subsidizing not the poor homeowner losing his or her house, or the worker thrown out of a job as Keynesian economics demands, but the gamblers and speculators in commercial and investment banking who caused the problem in the first place by taking advantage of the lack of proper internal control, as well as massive money creation for non-productive spending. (Well . . . that last is in accordance with the Keynesian prescriptions.)

The nail in the coffin (appropriately enough for our Horror Special) is that the financial services industry is getting a double benefit from the government bailout and subsidization of the gamblers on Wall Street. Not only are they making tremendous fees from transactions involving speculation without financing any appreciable amount of new capital, they are now, according to yesterday's Wall Street Journal, making huge profits by "investing" "excess reserves" in the stock market. ("Banks Turn Their Reserves to Profit," Wall Street Journal, 10/27/10, C1.) "J. P. Morgan Chase & Co. earned $4.4 billion in the third quarter, in part because it released $1.7 billion from the bank's loan-loss reserves." Once again, it evidently doesn't pay to go up against J. P. Morgan.

In plain English, the commercial banks are not lending to businesses to finance new or replacement capital, which is the purpose of a commercial bank. Instead, they are putting the money into the stock market . . . something not even an investment bank is supposed to be doing. This has dried up the ephemeral "supply of loanable funds," so that businesses are starved for credit.

The "supply of loanable funds" may be a meaningless concept within the Just Third Way understanding of banking and finance, which uses classic banking theory, but it is a virtual god within a financial and economic system locked into the assumptions of Keynesian economics. The bottom line is that by using bank assets to invest in something other than new or replacement capital in the agricultural, commercial, or industrial sectors, the financial services industry has completely abandoned its proper role in the economy, even by Keynesian standards. There could not be a better argument for the reforms embodied in Capital Homesteading.

Correction: the best argument is yet to come, although we hope it doesn't — the coming collapse when the house of cards being built by the weird union of politics, economics, and finance on a foundation of disproved Keynesian assumptions improperly implemented not only comes crashing down, but erupts in a financial inferno that few people in the United States can even imagine.

Wednesday, October 27, 2010

When we started this series, we thought there might be a problem coming up with enough horrible things happening to write about to last through the month of October. No, the problem is finding enough October to be able to use all the horrifying ideas we've been having as well as try and keep up with the new horrors "they" insist on inflicting on the world.

Take, for example, a column on the internet to which Our Man in Iowa, Guy Stevenson, sent us a link: "Brokers Flee Brokerages as Declining Assets Show Broken Model." 10/26/10, Financial Advisor Magazine. Setting aside for the moment (or for all time) the over-use of the word "broke" (too many people are broke for that to be even mildly amusing), we noted a disturbing development: lack of appreciation on the part of the powers-that-be for proper internal control of a company, a system, and an industry. The Big Buddy Brokerage Houses seem to accept conflict of interest as a given, a conflict that necessarily accompanies the vertical and horizontal integration of the financial services industry.

(English translation: because a single company sells the product, advises you to buy the product, finances the product, and even insures against loss if the product goes belly-up, there is a certain, shall we say, lack of independence and objectivity on the part of many brokers. It becomes in their best interest to do what is best for The Company rather than the investor.) Hence, brokers who are "troubled" with "scruples" and other unessential "feelings" tend to get out of the business, or go with a smaller company that is not a part of the overall integration of financial services. As the article relates,

While lacking the clout of big brokerages, independent firms boast of one advantage with clients: no conflicts of interest. Brokers at Merrill Lynch, for instance, are pressured to sell funds managed or approved by the firm because they pay a higher commission than those run by other companies, says Paul De Rosa, who worked at the brokerage for 26 years before co-founding his own firm, Gateway Advisory LLC, in Westfield, N.J., in January.

Many people interested in the health of the financial industry are reacting, although (in our opinion), not quite as strongly as they could — we're not hearing anyone serious about restoring Glass-Steagall, for instance. Still, half a loaf, etc.:

Registered investment advisors are urging the SEC to adopt the tough fiduciary standard under the Investment Advisers Act of 1940 that governs their profession. If advisors receive additional payments for recommending a particular fund over another, they must fully disclose the arrangement and obtain informed consent from investors every time they sell such a product, says Falls Church, Virginia-based Knut Rostad, chairman of the Committee for the Fiduciary Standard, a group of financial professionals. Advisers must also manage conflicts by, for instance, crediting that additional payment to their client's account rather than accepting it themselves, Rostad says.

Naturally, those who make the most money out of (alleged) conflicts of interest are the most vociferous about not being burdened with such trivia. Using an argument that sounds suspiciously like that used to dump Glass-Steagall, they are making an "SSDD"-type argument that boils down to the fox demanding the keys to the henhouse:

The Securities Industry and Financial Markets Association, a lobbying and trade group based in New York, says the stringent fiduciary rules of the 1940 act are unnecessary to safeguard investors and would restrict their options. SIFMA does support the idea of more disclosure.

This quote is absolutely priceless . . . I mean, valueless, which describes what the client ends up with once he or she gets the (wink-wink-nudge-nudge) "advice" from his or her financial analyst: "'We believe in a robust disclosure regime where the client can make the decision to consent to conflicts,' says Andrew DeSouza, a SIFMA spokesman."

Really? A client who is compos mentis is not going to be "consenting" to conflicts, period. Doctors, lawyers, accountants, clergymen, and others are called "professionals" because they practice a "profession." Part of being a professional is putting the client's interests first — it's what you're hired to do. You're not hired to put your own interests above that of the client or you are, frankly, a thief, taking money for a service you are not delivering. A "conflict of interest" is exactly that — a conflict between the client's interests that you are being paid to protect, versus your own interests. You're asking — demanding, really — that the client foot the bill for something that benefits you, not him or her.

In short, what the SIFMA proposes is that brokers only be required to tell their clients that they are robbing them, not that they stop it unless asked. Uh, huh. This is what they call a "Hobson's choice." It's like the thief holding a gun to your head and asking you if it's all right to empty your wallet into his or her own pocket. "No objections? You're sure, now. Okay?)

If you think that's bad, however, wait until you see what we've got planned for tomorrow's final episode in this series.

Tuesday, October 26, 2010

I think I finally understand Keynesian economics. Frightening as that thought is, it's an essential first step in helping people to understand the alternative that the natural law, social justice, and binary economics offers. Integrating binary economics, the Just Third Way has the potential to remedy the massive and seemingly unavoidable problems caused by reliance on Keynesian economics as the ideal model for global economic, financial, and political systems.

First, of course, Keynesian economics is directly contrary to the precepts of the natural moral law. It effectively abolishes private property and free association, calls into question the right to life, and redefines what it means to pursue happiness, that is, acquire and develop virtue. In Keynesian economics, the ordinary human person is reduced to the status of "homo œconomicus," that is, a purely economic unit whose human needs may be satisfied with a bare modicum of material goods, but whose wants are insatiable. (This actually contradicts the Theory of Marginal Utility, but it's not clear that Keynes was ever completely consistent in anything.)

The observation that Keynesian economics is directly contrary to the precepts of the natural moral law leads to a breakthrough realization. That is, Keynesian economics is not from this earth. Keynesian economics is from another planet.

Does this mean that Keynes was himself an alien being, and that Will Smith and Tommy Lee Jones failed in their mission to protect the earth from the scum of the universe? It would make sense, but (reluctantly) our in-depth study of Keynes and his thought reveals something even more sinister.

Keynes was an unwitting dupe of a highly evolved vegetative conspiracy intended to turn humanity into plant food. This was first chronicled by Roger Corman and Charles B. Griffith in the 1960 fact-based allegory, The Little Shop of Horrors. The film was discredited, first by changing the title from the more descriptive The Passionate People Eater, then by spreading the rumor that Corman and Griffith wrote the script overnight while drunk and filmed the movie in two days.

When the message failed to penetrate the inner sancta of academia and politics, it was remade into an off-Broadway musical and then into another documentary in an all-out effort to wake people up. Since the situation had only gotten worse in the interim, the message was made more explicit, as can be seen in this clip, in which one of the alien beings reveals why it has duped Keynes into promoting a economic principles and theories that bear absolutely no relation to reality. The alien tells the character representing Keynes (played by Rick Moranis) that the goal is world conquest. Humanity is simply a source of food for the aliens, and the sooner civilization is destroyed by "Keynesian" economics, the better.

The one bright spot is that, between 1960 and 1986 when the second effort was released in theaters, Louis Kelso and Mortimer Adler wrote The New Capitalists, with a subtitle that gives the human race the ultimate solution to the "slavery of savings" into which Keynesian economics has bound the human race: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."

Serious students of the cinema will immediately understand the significance of the "electrical" jolt that binary economics gives to Keynesian economics, blowing apart its complete reliance on past savings, and ending the alien threat represented by Keynesian economics. Of course, since (as Father William Ferree pointed out in Introduction to Social Justice), the work of social justice is never done, the very end of the film reminds us to remain vigilant lest Keynesian economics once again grow up among us.

Nowhere is the alien nature of Keynesian economic better illustrated than in the way it relies on inflation and consumer credit to run an economy. There is no other way to explain how, in an economy that has the capacity to produce far more than is necessary to provide a comfortable living for everyone, there is want, even desperate need. How can that be? Because the alien idea has intruded that the only way to finance new capital formation is by cutting consumption and saving.

The problem is that the rich are already saving, in fact, their savings are already invested in new capital (and, of course, old capital). Where do we get the additional savings?

From wage workers. Through artificially induced inflation, prices for wage workers go up. This forces wage workers to cut consumption, thereby generating the savings necessary to finance new capital formation. The savings are passed on to producers in the form of profits, thereby putting the money into the hands of people who will use it for reinvestment rather than consumption.

This, however, means that "the economic dilemma" kicks in. Without the savings generated by cutting consumption for financing, there will be no new capital formed. At the same time, without the consumption to provide the incentive for producers to invest in new capital, there will be no new capital formed — people do, after all, have to buy the goods and services produced.

Or do they? Keynesian economics stipulates that when people are unemployed and not producing, they should be put to work producing goods and services that cannot be marketed! The sole purpose of this useless production is to generate effective demand without increasing the supply of marketable goods and services. Why must you not increase the supply of marketable goods and services? Because that drives prices down, and you need to drive prices up in order to force people to cut consumption! In Keynesian economics, you're better off if you produce nothing and the State just prints money and gives it to you.

The problem is that there's only so much in the way of unmarketable goods and services you can produce before things start to fall apart. The answer? Consumer credit. Consumer credit increases effective demand without producing any good or service, marketable or unmarketable. The downside is that, in the long run, borrowing today requires that you repay tomorrow. Eventually that means that the income you get tomorrow cannot be saved, because it was spent today, or yesterday. It can't be saved because it was already consumed.

The only way out is for consumers overburdened with debt to declare bankruptcy. True, this stiffs the producers that sold on credit, but the government can bail them out. It also gives the consumers a clean slate so they can borrow more money, then declare bankruptcy again, while the government creates more money to bail out producers.

Is there any question but that this is an alien conspiracy? The plant alien in Little Shop of Horrors made this perfectly clear with its demands to be fed constantly on the life's blood of humanity, an obvious allegory for the misuse of credit, the life's blood of the economy, with the goal of world conquest.

Of course, we could also just get rid of the whole Keynesian shtick and go with a more common sense solution, say, Capital Homesteading. Or is that just too wild and unbelievable compared with the surreality of Keynesian economics?

Monday, October 25, 2010

It's classic horror cinema at its finest . . . at least in theory. An unsuspecting boob gets thrown into a situation that is at first baffling and then becomes incomprehensible. He (or she) makes a mistake that opens up the Gates of Hell or a reasonable facsimile thereof, and, uh, all hell breaks loose. The hero/heroine undergoes some kind of personal transformation. After superhuman and heroic effort, the evil is defeated, although — to ensure the viability of sequels, if any — there is always the threat that the evil wasn't quite defeated, and may rise again. In fact, it inevitably happens that whatever was done to defeat the evil in the first film only makes the horror worse in subsequent episodes.

The film is Sam Raimi's 1993 epic Army of Darkness, the logic-bending sequel to Evil Dead (I and II: they're the same pictures, pretty much) starring Bruce Campbell, who has made a good thing out of playing the hero who is almost there, but not quite. Campbell, who can pitch a screen image that is almost rational at times, comes across as a bloodthirsty and more-than-a-little-paranoid Zero Mostel, the late, great actor who could convince people he was criminally insane merely by sitting still. Not just the special effects, but Campbell's ability to deliver the most outrageously stupid lines while projecting absolute sincerity compel admiration of Army of Darkness not only as classic horror, but classic comedy . . . if a trifle sanguinary. (Okay, a LOT sanguinary. The fountain of blood may be a bit much.) A true hero (in fiction, at least) is not consciously being heroic, any more than a comedian is being consciously funny. Sincerity is essential to making the unbelievable believable. Consequently, the movie's tagline pretty much says it all: "Trapped in Time. Surrounded by Evil. Low on Gas."

Briefly, Campbell ("Ash Williams") is a clerk working at S-mart ("Shop Smart. Shop S-Mart . . . Got it?" he yells at the hapless Medievals among whom he finds himself) who in the previous film fought against an unnamed evil that slaughtered all his friends. He's thrown 700 years or so into the past during the final battle. Army of Darkness begins with him (and his car) dropping out of the sky. He's taken prisoner on suspicion of being an enemy spy. Gets thrown to some weird creature. Escapes. Blasts away with his shotgun, waves his chainsaw-hand around (short story, see the movie for explanation). Gets sent to recover the Necronomicon Ex Mortis, the "Sumerian Book of the Dead" with a Latin (?!) title, never intended for human eyes. Screws up saying the words to defuse some curse or other ("Klaatu barada nikto" from The Day the Earth Stood Still, 1951). This awakens the "Deadites," the "Army of Darkness," who want their book back. They fight. Ash wins. Gets sent back to the future . . . and screws up the words again.

Back in the real world (more or less), we find the Congress back in the 1980s preparing to fight off the unnamed evil of the growing threat of European financial hegemony as the European Union draws ever closer. The rationale is that banks in Europe have always been allowed to mingle incompatible functions, and the State regulators ensure adequate oversight so that conflicts of interest don't occur.

Glass-Steagall is partially repealed, allowing financial institutions to break down divisions and blur specializations that had been instituted to protect the economy and consumers, as well as the financial industry itself. The Savings and Loan crisis ensues. It's "solved" not by reinstituting separation of function and other internal controls, but by imposing new external regulations and using tax money to bail out the financial services industry.

The rest of Glass-Steagall was repealed just before the institution of the Euro and the near-total amalgamation of Europe's financial system. This was so that American financial service companies could compete with the Europeans on their own terms. The "experts" asserted that government regulation would be adequate, just as it was for the prior partial repeal, and that internal controls achieved by separation of function are unnecessary, costly, and counterproductive. Congress agreed. The financial services industry immediately became integrated both vertically and horizontally.

Unfortunately, just as Ash forgot to say the magic words properly and so prevent the Evil Dead from awakening, Congress forgot that external regulations can never take the place of good internal controls. A regulation allows the government to prosecute, punish, and correct when somebody does something wrong . . . assuming 1) the Evil Dead, I mean, the culprits get caught, 2) the case can be proved, 3) it comes to trial, and 4) the jury agrees. Relying on regulations that prohibit conflicts of interest, inappropriate transactions, etc., is, frankly, to rely on opinion. Violating an internal control, however, is a matter of fact. "There will be no related party transactions" is substantially different from "You will not have any related party transactions that may involve a conflict of interest." Whether the former occurs is a fact, and can be proved. Whether the latter occurs is an opinion, and a judge or jury can often be persuaded otherwise.

The bottom line is that we not only need to repeal the repeal of Glass-Steagall, we need to strengthen it, and institute a sound system of internal control throughout the entire financial services industry. Otherwise, we are all going to end up like Ash, making the same mistakes over and over, and using the wrong magical words to try and achieve our goals.

Friday, October 22, 2010

There's so much going on right now that it's difficult to know where to start. It's also a little bit difficult to relate the more important accomplishments and events of the week, especially since so many are either intellectual, social, or incredibly complex to describe. Pretty much the best we can do is give some of the items that both those of us "in the know" and casual visitors to the blog can readily grasp, and put the other stuff on hold until it bears concrete or comprehensible fruit.

Okay, I just realized what "concrete fruit" sounds like — it puts us in mind of the instructions on "How to Cook a Coot." Summarized, stuff the coot with a brick, cook until the brick is soft, then throw away the coot and eat the brick.

There's probably a good analogy to Keynesian economics in there, somewhere. Implementing Keynesian economics doesn't do any more good than cooking a coot, although there might be some things done at the same time as Keynesian economics or in conjunction with them that can be employed as expedients . . . as long as you don't rely on them for permanent solutions. You can probably eat a brick if it's soft enough, although you can't live too long on a diet of baked clay, just as a society can survive for a time redistributing existing wealth as an emergency measure without producing anything.

Part of the problem, of course, is that the economics of the Just Third Way just don't fit into the framework currently used by most people today. Take, for instance, the letter we read in this morning's Wall Street Journal, blaming runaway government spending for the lack of new capital formation and genuine economic growth. That's true — up to a point. The argument was that increased consumption by government or actual people ("consumers") dries up the supply of loanable funds and inhibits or prevents the financing of new capital formation.

Almost, but not quite. As we explained in the letter we zipped off (which will probably not be published),

While I share Mr. Keith Eubanks's concern for runaway government spending expressed in his letter in the 10/22/10 Journal, government spending per se is not the problem. It is government spending backed by future, possibly unrealizable tax revenues that harm the economy and undermine sovereignty — government debt, not confiscatory taxation; although high taxes cause their own problems. Increases in consumption do not inhibit, but stimulate capital formation. As Dr. Harold Moulton, president of the Brookings Institution from 1916 to 1952, demonstrated in The Formation of Capital (1935), demand for capital is derived from consumer demand. Periods of intense capital formation are invariably preceded by increases, not decreases in consumption. Financing for new capital formation comes not from existing accumulations of savings, but from the expansion of commercial bank credit via the discounting and rediscounting of bills of exchange. Louis Kelso and Mortimer Adler refined Moulton's analysis in The Capitalist Manifesto (1958) and The New Capitalists (1961), adding the proviso that, for the economic benefits of growth to have the optimal effect, new capital formed via "pure credit" mechanisms must be broadly and directly owned by as many people as possible, the acquisition collateralized with capital credit insurance and paid for out of future earnings.

Okay — the version we sent didn't have the advertisement for The Formation of Capital. Or the links to the Kelso books. That would have been just a little too crass, even for us. They can find it, though, if they really need to . . . and they need it, desperately. They just don't know it, yet.

That's where you come in. Door opening, people. (I always hate people who call other people, "people." They're not "people persons," they're "people-people persons.") Open doors to prime movers, and to other door openers who can get us to prime movers. Don't try to sell the idea yourself — it makes you look like an opportunist, and isn't effective in most cases, anyway. What you want to do is know enough about the idea to sell the idea of the idea (I can't believe I'm saying this, either, it's another expression I hate), the sizzle, not the steak. Get the door open for the CESJ "core group." Sort of like this:

• Norman Kurland is, at this very moment, in Beijing, participating in the Caux Roundtable on ethics in business. He took a great deal of Just Third Way material with him, focusing (of course) on Capital Homesteading, but also including a couple copies of our Chinese translation of Curing World Poverty. • The "Halloween Horror Specials" seem to be particularly popular, especially "I Do Believe in Spooks." Not that the longer pieces are not popular, too, but the Halloween pieces have generated a few more comments, plus more people are linking to them. • Michael Greaney sent out a number of .pdfs of Supporting Life: The Case for a Pro-Life Economic Agenda to individuals responding to some postings in various LinkedIn groups. Requests came from Texas, Virginia, Michigan, and Colorado. If you belong to a network of that sort, consider publicizing some of CESJ's new publications, especially The Formation of Capital and Capital Homesteading for Every Citizen. • This week we've received a sudden spate of interest in CESJ's programs, largely as the result of two things coming together: 1) greater participation in the various social networking media, and 2) alerting people to the fact that CESJ may have some viable solutions to offer. Of particular interest this week are the Citizens Land Bank concept and, especially, the Homeowners Equity Corporation as a possible approach to the foreclosure crisis. • Theresa Gorski won a thumbs-up and two attaboys for presenting the Capital Homesteading and Homeowners Equity Corporation concepts to candidates for office in Michigan. The politicians — welche wonne! — went so far as to thank her for her efforts. Theresa wins this month's Door Opener Award, and we'll send her the prize as soon as we find something appropriate. • As of this morning, we have had visitors from 49 different countries and 49 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Australia and Brazil. People in Trinidad and Tobago, Venezuela, Lithuania, the United States, and Belgium spent the most average time on the blog. The most popular posting is "I Do Believe in Spooks" in the current Halloween Horror series, followed by "The New Manifest Destiny," an old posting from 2009 "We are Seeing the Future and It Doesn't Work," "The Keynesian Bloodletting," and the review of Tom Kratman's State of Chaos.

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

Thursday, October 21, 2010

If you are fortunate to find Aladdin's magical lamp with the none-genuine-without-this-seal genii on board, you get three wishes (the Disney version, anyway). Of course, if you are a reader of semi-heroic if not satiric fantasy and happened at some point to come across Jack Chalker's double trilogy of the "Dancing Gods," you know that you get as many wishes as you want . . . but it's only safe to make one. Going further a-field, we find that even the full three wishes always seem to have built-in catches, such as wishing for a sausage for dinner, getting it hooked on to your nose, and then spending the last wish having it amputated. Other stories have the presumed benefactors wishing for a ton of gold and getting squished by the weight of metal, to say nothing of the inflationary effect of so much specie appearing on the market all at once.

Let's be honest. The whole wish thing, whether we're talking Aladdin and the genii, or Darby O'Gill and King Brian of the Little People, is nice to hear about. It's even amusing if you can get Robin Williams to dub a voice or two and let loose with his inimitable stream-of-consciousness patter. The problem is that it's based on the belief that you can get something for nothing, and usually end up getting nothing after heroic effort . . . just as in Keynesian economics.

By now you're thinking that I put the wrong title on this posting. Shouldn't it be, "Keynes and His Wonderful Lamp," or (my favorite, if a trifle subtle) "Keynes Addin'." You see, in Keynesian "multiplier theory" you put money into a bank and it magically expands to the reciprocal of the reserve ratio just by depositing and re-depositing checks, double, triple, and fourple counting them and never presenting them for payment through the clearinghouse. This is a sleight-of-hand that spoilsport Dr. Harold G. Moulton exposed in The Formation of Capital, and . . . never mind. We'll stick with ripping off Tim Burton's title for his holiday treat and go with "The Nightmare Before Keynesmas."

To the Pointmobile, Robbing.

If you insist. Want to hear something truly horrifying? Halloween now ranks right after Christmas as the biggest "money holiday" for retailers. People that were going into debt for Christmas until May, June, or July of the subsequent year, are now adding mountains of debt on top of that to "do" Halloween. As a result, consumers are buried permanently under a load of debt incurred to purchase paper skeletons and sexy witch costumes to wear for an hour or two, and enough candy to create lifelong job security for divisions of dentists. It sounds as if Halloween is a total waste of time and money.

Stop and think for a moment, however. Halloween is the perfect Keynesian holiday. It celebrates nothing. The decorations rarely last past the day itself and aren't often reused — what, after all, would you use them for? In fact, the sight of smashed pumpkins the day after October 31 is now as traditional as a soaped window or overturned outhouse. You can't even make a decent pie with the type of pumpkin commonly used for the Jack O' Lantern: it's usually a "field pumpkin," much rougher and stringier than a sugar or squash pumpkin and originally grown for animal fodder. The candy is usually gone within a week, if not 24 hours.

There is, ultimately, practically nothing that lasts beyond the day itself, or has any significance apart from the holiday. Even the most secular Christmas celebration generally yields loot intended to keep the lid on greed and serve some useful or semi-useful purpose until the next celebration of the birth of the Savior or your own, more important, birthday intervenes.

In The Recovery Problem in America (936), the aforementioned Harold Moulton identified the two primary areas of focus in a recovery — or in a stable economy, for that matter — as employment and production . . . with production taking primacy of place. For Moulton (as he made clear in America's Capacity to Produce, 1934, and America's Capacity to Consume, 1934), as for Adam Smith in The Wealth of Nations, the purpose of production is consumption.

That is the essence of Say's Law of Markets and the real bills doctrine — we can only purchase what others produce with what we produce, and cannot consume unless we produce. "Money" is simply the means by which we exchange our productions for the productions of others, and is therefore anything that two or more parties to a transaction agree can be used to settle the debt, that is, convey a private property right to another to meet an obligation that has been incurred.

Not according to Keynes's Nightmare Economics. The purpose of production is not consumption, but to generate effective demand to clear existing production. Goods pile up unsold because advancing technology displaces labor, and people who produce only by means of their labor are no longer able to produce. In accordance with Say's Law, because they cannot produce, they have nothing to exchange for what others produce, and thus the productions of others remain unsold.

Louis Kelso's solution to this problem is, in hindsight, obvious. If technology is the predominant factor of production, then people must become owners of production. Say's Law is indifferent to whether someone produces by means of labor, land, or capital — what matters is that someone can produce, and therefore be able to consume whatever he or she produces directly, or — through "money" as the medium of exchange — trade surplus production of one's own for that of others.

No, said Keynes (okay, he developed his theories before Kelso was born, but this is the gist of it). Production is not a problem. Don't worry about it. Advanced technology has the capacity to produce everything we need. The difficulty is how to get the results of production (income) into the hands of people who will use it for consumption (effective demand) without, at the same time, harming the ability of producers to finance new capital formation (savings, which only equals unconsumed production in Keynes's universe).

And there's the rub. As far as Keynes was concerned, and in common with all other "Currency School" based economics, "money" is not the symbol of the present value of existing and future marketable goods and services in which the issuer of the money has a private property right. On the contrary, "money" is a special creation of the State by means of which the State redistributes wealth by creating purchasing power and distributing it according to whatever expedient occurs to the politicians. Money, to Keynes and all other Currency Schoolers, is a State-generated claim on the present value only of existing marketable goods and services in an economy. Really? Yes. Keynes said exactly that on page 4 of Volume I of his Treatise on Money: The Pure Theory of Money. (New York: Harcourt, Brace and Company, 1930.)

Check it out if you don't believe me. Copies are a little scarce, though. Keynes kind of swept his almost-magnum opus under the rug after Friedrich von Hayek pointed out a few weaknesses in it, but Keynes never repudiated it. In fact, he referenced it in what became the Keynesian "bible," his General Theory of Employment, Interest, and Money (1936). He didn't improve the analysis or the performance, however. The effect of Keynes's analysis is to abolish private property in the means of production, deny freedom of association by asserting total State control over the right to enter into contracts, and redefine what it means for something to be "money."

The bottom line? If money represents only the present value of existing marketable goods and services, then existing accumulations of money savings are the only source of financing for new capital formation. If true — and Keynes held this as a virtual religious dogma — then only people who already own capital have the capacity to own capital, unless the State, either by direct confiscation or by manipulation of money and credit, performs some kind of redistribution or takes over direct control of the economy. (General Theory, VI.24.iii)

As a result, vast quantities of goods pile up unsold because no one has the effective demand — income — with which to purchase them. The Keynesian solution is to increase production of goods and services for which no market exists, and which do not compete with the genuinely useful marketable goods and services that remain unsold. Producing non-marketable goods and services, either directly, or through subsidized "job creation" creates sufficient effective demand to clear the marketable goods and services at the newly inflated prices resulting from increasing the money supply.

Tremendous waste is built into the system, but that's okay as long as enough other, more useful goods and services are produced to take care of people's needs. (Wants are another matter in the Keynesian universe, for — contrary to the theory of marginal utility and plain common sense — it is impossible for anybody ever to be satisfied with anything. Humans are insatiable consumption machines, not moral beings.) If things are out of sync, then the government can fix things by diddling around with the currency, as in Georg Friedrich Knapp's socialist program called "Chartalism."

Thus, Halloween is the perfect solution to the problem of generating effective demand. It produces nothing of lasting use, it celebrates nothing, and it is incredibly wasteful. It's even better than war, which Keynes said could be used if the politicians couldn't think of anything better, because the body count is much lower. Usually. Maybe we should rename October 31 "Keynesoween" or "Keynesmakah" ("Chrismakahkeynesamadan"?) in honor of its increasing importance as a bottomless pit into which we can toss otherwise useless goods and services in order to stimulate effective demand.

On the other hand, we could start to act reasonably, and give serious consideration to the claims of the Just Third Way as applied in the Capital Homesteading proposal. There's a scary thought . . . for academic economists and others who have staked their lives, semi-sacred honor, and our fortunes on the vagaries and contradictions found in the nightmare of Keynesian economics.

Wednesday, October 20, 2010

It's considered one of the classic horror films of all time. In 1912 Paul Wegener produced Der Student von Prag — "The Student of Prague." It was remade in 1926 and again in the 1930s. According to my sources, the latter version was somehow turned into a Nazi propaganda film, and is consequently very difficult to obtain. My sources claim that there was some use of Das Horst Wessel Lied (lots of links, but it's too creepy even for a Halloween Horror Special), the anthem of the Nazi Party, and that the film was consequently banned in Germany, and nobody else really cares about it.

This is more than a little bizarre, for Wegener was using European Jewish legends as the foundation of his plot, as he would for Der Golem, stories of which he heard while working on location for Der Student von Prag. I found a very short clip from the 1935 version, though, here, and a recording of a song featured in the film here. You can't really compare the three versions from such a small clip, but the 1935 version comes across as pretty dull after seeing the remarkable 1912 and 1926 versions. It's . . . fluffy.

The outline of the story is familiar from folklore and from having been used endlessly by Hollywood. A poor student, Baldwin, will receive unlimited wealth, the girl of his dreams, and social success at a price to be determined by the sinister Scapinelli: whatever Scapinelli sees in Baldwin's rooms that Scapinelli wants. Since Baldwin figures he has nothing worth a halbpfennig to his name, he agrees. The deal seems even better when the object chosen by Scapinelli turns out to be Baldwin's reflection in the mirror — hardly something on which one can put a value.

You know what's coming. The reflection turns out to be Baldwin's soul. Naturally (natürlich), Baldwin's soul is now under the demonic Scapinelli's control (and, of course, Baldwin no longer has a reflection). Baldwin quickly gains everything promised, only to lose it again or have it rendered worthless or meaningless as his Dopplegänger destroys everything. Baldwin, clearly unaware that his soul is himself, finally decides to kill the reflection by firing a pistol at it, and (as we might expect) kills himself by killing his soul — a twist used to good effect by Oscar Wilde in The Picture of Dorian Gray (1890). The viewer is adjured to pray for the soul of Baldwin, who (for all his good qualities) was tricked into suicide.

Boiling matters down to their essentials, it's the old story: be careful what you pray for — you might get it. Baldwin was a popular, if poor, fellow with the other members of his "student corps" (difficult to explain these days, but roughly analogous to a fraternity), and clearly had good intentions. After gaining endless wealth (100,000 gold Gulden, the equivalent of several million dollars today), he endowed scholarships for (other) poor students, spent lavishly for the entertainment of the other members of his corps, gave to charity, and bought expensive gifts for the girl of his dreams.

Fast forward to the present date and to the semi-real world. Why only "semi-real"? Because the global economy is in the grip of Der Student von Keynes, or (more accurately) Die Studenten von Keynes.

This is more than a little ironic. At the end of his General Theory (1936), Keynes sneered at anyone who did not accept his theories in words that have an appropriately shivery echo today:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. (General Theory, VI.24.v)

What's so chilling about that? Keynes was solid "Currency School." The basic tenets of the Currency School of finance are in direct conflict with a natural law understanding of money and credit. "Money" changes from being anything that can be used in settlement of a debt, to whatever the State says it is. (Vide John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4; cf. Georg Friedrich Knapp, The State Theory of Money. London: Macmillan and Co., Ltd., 1924.) Consistent with the rejection of the natural moral law based on Intellect rather than Will, this understanding of money and credit takes the existence of a totalitarian or absolutist State for granted. (Mortimer Adler, "The Meaning of Natural Law"; Heinrich Rommen, The Natural Law. Indianapolis, Indiana: Liberty Fund, Inc., 1998, 51-52.)

It comes as no surprise that Keynes's economic and political philosophy parallels that of Walter Bagehot, who lauded the State control over money and credit established by the British Bank Charter Act of 1844 (Lombard Street, 1873) and the absolutist political philosophy of Thomas Hobbes, detailed in Leviathan (1653) (The English Constitution, 1867). All of this was considered a triumph of the theories of the Currency School. The most damaging assumption of the Currency School — politically, financially, and economically — is that the only way that new capital formation can be financed is by cutting consumption, accumulating money savings, then investing.

We've already analyzed the dogmatic faith in the Currency School's Monetas Solo position in greater depth than many people care to hear about. Today we want to take a look at the gruesome results of selling your soul to past savings in light of the legend of the Student of Prague. The parallels (appropriately enough) are, well, horrifying.

We'll update the story a little bit, though. Instead of a student, "Baldwin," in Prague in the 1820s, we'll make up a mythical country, "the United States of America" ("America" for short), in the 1920s. The mysterious if satanic "savior" . . . what the heck, let's call him "Lord Keynes."

America is at its wits end. The stock market has just crashed. Unemployment is rising rapidly. The price level is falling. Desperate for a way out, America listens to the mysterious Lord Keynes, despite the warnings of its friends and well-wishers, such as the Gypsy dancer Glenda Moulton and Herr Professor Dietrich Brookings. In exchange for the independent spirit of America — its soul — Keynes delivers what seems to be prosperity and the answer to all problems.

When examined closely, however, there's always a catch to the presumed benefits. Where do the increased savings come from in the Keynesian satanic bargain? From the diminished purchasing power of wage workers as their pay buys fewer and fewer goods and services. (General Theory, II.7.iv, IV.14.i, V.21.i, VI.22.vi.) Jobs are created, yes, but the labor is used to produce goods and services that are not put to any useful purpose. (Ibid., III.10.vi, IV.16.iii.) There is plenty of money, but each unit is worth less than before, and unemployment only goes down as the price level goes up. (Ibid., III.10.iii, V.21.v.) People are working, but they're worse off than they were before the Crash.

Finally, of course, Lord Keynes's policies direct the economy, putting the State in place of private interests, giving it near-total control. (A Treatise on Money, loc. cit.) Liberty and property, as well as the pursuit of happiness, take a back seat to artificially induced prosperity supported by increasing redistribution of existing wealth and government control over the life of every citizen.

After a while, three-quarters of a century or so (countries have a somewhat different lifespan and time frame than poor students), things begin to unravel at an accelerating pace. The students of the now-defunct Keynes continue to try and carry out the contract America made but — in true Keynesian fashion (ibid.) — the terms of the contract seem to have been altered in some mysterious fashion. America keeps its part of the bargain (slavish devotion to Keynesian economics), but even the rather hollow benefits promised seem to have evaporated. The catches are still there, but the benefits that are supposed to balance things out don't seem to be in evidence. Finally, in a frenzy of despair, America commits suicide by leapfrogging over Keynesian economics and political theory, and going straight to socialism and an absolutist State.

Fortunately, unlike people, having lost its soul, a country can get it back. I realize it's a bit of a departure to end a Halloween Horror Special on a note of optimism, but I can't help it. It's just the way I am. A necessary first step is to reform the financial system, acknowledging that the contract with Lord Keynes to deliver America's soul was never binding due to lack of consideration. The fact is that Keynes, like Satan in the traditional bargains, never delivered on his end, or did so in a way that rendered the benefits the opposite of what was desired. His policies didn't end the Great Depression. World War II did that. Subsequent history has simply been a repeat. Every genuine social and economic benefit attributed to Keynesian economics has really been due to something else entirely.

We've got a very long list of reforms to correct the situation, but we'll try to make it quick.

• Reinstitute Glass-Steagall and give it a nice big set of choppers. • Prohibit the Federal Reserve from dealing in primary or secondary government securities, whether through discounting, rediscounting, or open market operations. • Establish a 100% reserve requirement for member commercial banks by mandatory rediscounting of all qualified loans at the local regional Federal Reserve. • Restrict open market operations to the qualified paper of non-member banks and individual companies. • Cease manipulation of interest rates charged on loans of existing accumulations of savings, let the market determine the rate of return. • Limit the discount rate to the amount necessary to cover costs and a just profit, plus a risk premium if not covered directly by the borrower. • Privatize the Federal Reserve by making the citizens and permanent residents in each region the direct owners of the regional Federal Reserves through the issuance of no-cost, non-transferable, fully participating voting shares, one to each natural person.

Obviously there has to be a lot more than that to it, but that's enough to give the idea. Considering the alternative, it's time to get started.

Tuesday, October 19, 2010

It's something of a record. To date, there have been nearly 200 film versions of Bram Stoker's Dracula, more flicks than any other single cinematic source. In distant second are the various adaptations of Sheridan Le Fanu's Carmilla, with a nod toward (and a clean set of heels away from) the notorious Countess Elizabeth Báthory, the "Blood Countess." Of interest to very few people is that both of the fictional vampires were the creations of Irish writers.

The original, "real" Dracula legend also has a tie-in with Ireland. It seems that Edward IV's favorite sociopath, John Tiptoft, earl of Worcester, "the Butcher of England," as Lord Deputy of Ireland brought his favorite methods of execution (beheading, quartering and, especially, impalement) with him in furtherance of his duties in 1467. Tiptoft entered legend himself by encompassing the deaths of the popular earl of Desmond and his two sons — one too young to know what was going on — on trumped-up charges of treason.

It seems that Tiptoft, one of the most brilliant scholars of his day (who says a genius can't be a psychotic?), collected early printed books (incunabula) . . . of which the anti-Vlad propaganda pamphlets issued by the German settlers in Wallachia (from which much of the Dracula legend derives) comprise a significant proportion. The Vlad in question, of course, was Vlad III Tepes, Voivode (Prince) of Wallachia, "Vlad the Impaler," usually given the title borne by his father: Dracula. We won't get into the issue of whether Vlad was framed by his enemies, or whether Humpty Dumpty was pushed.

So much for the Halloween Horror aspect of today's posting. How are we going to work in the eponymous "Fed the Impaler" shtick? (BTW — looking up "eponymous" will get you something similar to what looking up "lascivious adulterer" ["Don't call me that until I find out what it means!"] got the Peter Sellers character in What's New, Pussycat? — "a man who is a lascivious adulterer.")

Nothing easier. Just as Tiptoft, the 15th century Irish power-that-was, copied the worst possible model for politics (the Dracula legend/propaganda), the current Irish leadership is copying the worst possible model for economics: Keynes, and American efforts based on post-Keynesian prescriptions. Nowhere is this more evident than in the housing crisis afflicting both countries.

Only a short time ago the "experts" in both countries were loudly proclaiming that the problem was all over except for the remaining bailouts, subsidies, stimuli, and increased government debt. No problem. The Great Recession is over; there will be no double dip. (Of course not. You can't double up when you're still in a single.) Then the next round of financial crises started. Don't worry, though. The plan that worked so well before will work again: spend more money that you haven't got to rescue the gamblers and leave the poor schmoes who over-bought or under-paid based on the rosy colored prognostications of those same experts hanging out to dry.

Fear not. There really is a potentially viable, natural law-based solution that has been developed. It is a possibility with which both countries — or any country, for that matter — can experiment. You've seen it mentioned once or twice on this blog already, so (like yet another Dracula remake — do I hear cries of, "Blah, blah!"?) prepare to see something you've seen before, and even managed to work in its component parts. It just hasn't been put all together into an integrated system. Yet.

And, yes, we know we keep pushing the basic idea. That's only because the powers-that-be keep pushing programs and principles that have been shown time and again not to work. Why, then, should we let up on something that actually has a track record of sorts, even if limited? Why dismiss something that has been shown to work, and keep hitting us over the head with something that has a perfect record — of failure?

We refer, of course, to the "Homeowners Equity Corporation," or "HEC." (We know it would be more in keeping with the theme of this series and the season to call it a "HELL," or "Homeowners Evil Liability Liquidation," but from yesterday's posting you know of our success with trying to force an acronym.)

(Don't you just love all these parentheticals?)

Briefly — for we have to get back to our coffins before the first ray of sunlight embiggens the dawn — the HEC would be a for-profit stock corporation that purchases foreclosed residential properties in a local community, and through a "lease-to-equity" arrangement would enable homeowners facing foreclosure to: 1) remain in their residence, 2) pay off the market cost of the residence, and 3) build up equity as shareholders of the HEC.

The HEC would allow citizens to escape from the worst form of credit (loans for consumer goods that don't pay for themselves and are made to people who can't repay the loans) to the best form of credit (loans to purchase capital assets that pay for themselves and that turn non-owners into owners of income-producing assets). The HEC concept is based on a new monetary and tax approach that promotes the financing of private sector capital formation in ways that create new owners of that growth and thereby spread purchasing power throughout the economy.

One of the key characteristics of the Homeowners' Equity Corporation idea is that it minimizes risks of the resident-shareholder foreclosing on the home mortgage by acting as a form of capital credit "insurance," through pooling of risk. There will always be a certain percentage of homes that are unoccupied for a time, but the shareholder's equity will be based on a HEC's value per share, based in turn on the aggregate value of all homes owned by a HEC, not the value of the home occupied. Also, a HEC's value per share will depend in part on the occupancy rate of all homes, as will the payments on the loans used by the HEC to acquire the homes. It is obviously much easier to make payments on 100 houses, of which 90 are occupied and generating rent payments, than on a single house with no rent payments coming in.

The HEC would also provide a means for those who cannot afford monthly lease payments on their home, to participate in the lease-to-equity program. Vouchers linked to need (for a specified amount of time) could be provided. (For example, 25% of a HEC resident-shareholder's income would go to cover housing leases. The amount of the voucher to supplement this would be the difference between the homeowner's total income and the monthly lease payments. To protect against people playing the system, there might need to be a limit on how much of a voucher someone could receive and for how long they could receive a voucher to remain in a particular residence owned by the HEC.)

Ireland would be the perfect place to experiment with the HEC. The concept of public housing is well entrenched. It would be a small leap for people to accept ownership by the public instead of public ownership. This is especially true since the "feel" of the arrangement, while based on individual private ownership, is more communitarian than most private ownership and has a superficial resemblance to a standard rental arrangement — but one from which you can walk away with the value of the equity you've built up, rather than a pile of rent receipts.

The alternative? Continue to let outdated financial technologies and disproved economic dogma exsanguinate the economy and fail to bring the HEC and other Just Third Way programs to the attention of prime movers and potential door openers.

Monday, October 18, 2010

As reported in the October 15 issue of The Washington Post, everybody's favorite dead man walking, Federal Reserve Chairman Benjamin Bernanke, is preparing to unsheathe the ultimate Keynesian weapon in the War Against the Recession . . . which (fortunately for Mr. Bernanke) has the easily remembered acronym, "WAR." It sounds better than the alternatives, anyway: WAG P3 ("War Against the Great Depression, Part III") or WAD ("War Against the Depression"), the former suggesting they might not be completely serious with this crazy fiscal and monetary bologna, the latter hinting at just how much the financial powers-that-be have made in manipulating the currency and restructuring the financial system to bring down the last remnants of private property and a sound monetary system.

And what, exactly, is this Ultimate Keynesian Weapon? (We tried "Year's Ultimate Crazy Keynesian Stuff" — YUCKS — and "Weaponless Attack on Currency, the Keynesian Offensive" — WACKO — before giving up and going with "UKW" that doesn't have another meaning. We can't always be clever, you know.) Anyway, according to the Washington Post, "The Federal Reserve is prepared to take new action to boost the economy, its chairman, Ben S. Bernanke, said Friday morning, because inflation has been too low of late and unemployment is poised to come down too slowly. The Fed's policymaking committee 'is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate,' Bernanke said in prepared remarks."

We again resist the urge to let loose with a semi-involuntary, "Huh?" and try to make sense of this nonsense. "Inflation has been too low of late." Uh, huh. I know that I seem to be spending more and getting less. How about you? Since when is having your pocket picked and the purchasing power of your wages reduced by currency manipulation through induced inflation, whether at a high or low rate, a good thing? That's not the good part, though. The juicy bit is the perceived necessity "to return inflation over time to levels consistent with our mandate."

Come again?

Enlighten me, O Great One. Where does it say that the Federal Reserve has a mandate to maintain high levels of inflation . . . or inflation at all? Section 2A of the current version of the Act clearly states that "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Let me get this straight. The Federal Reserve Act seems to be saying that, in order "to promote the goals of maximum employment, stable prices, and moderate long-term interest rates," the Board of Governors and the Open Market Committee will "maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production."

Read that carefully. The underlying assumption embodied in § 2A is that fostering production by maintaining money and credit policies "friendly" to private sector production of marketable goods and services will result in promoting full employment, a stable price level, and keeping interest rates steady. Now read again what Bernanke said in his "prepared remarks." He wants to increase the rate of inflation in order to bring down unemployment. He is not only putting the cart before the horse, he is unhitching the horse and driving it away with a whip. He then wants to hitch two carts together, evidently expecting them to draw each other while the peasants and the soldiers in his WAR eat the horses, thereby making it impossible to carry on the fight or do anything else . . . like move the cart.

What's wrong with that? It is, after all, the usual Keynesian balancing act between inflation and employment — like love and marriage, you can't have one without the other in the Keynesian system. (And, lest you missed the heavy-handed analogy, "eating the horses" is redistributing existing wealth and liquidating investment for consumption in preference to financing new capital formation.)

The problem is that Bernanke's (and Keynes's) program not only confuses cause and effect, it assumes that one effect is the cause of another. Really? Not according to § 2A of the Federal Reserve Act, under which Mr. Bernanke allegedly operates.

According to § 2A, both full employment and low inflation are the good effects — not the causes — of fostering production. You do not bring about inflation by lowering unemployment, or lower unemployment by causing inflation. On the contrary, you lower unemployment and keep the brakes on inflation by making it possible for people to produce marketable goods and services by means of their labor, capital, and land. Harold Moulton pointed this out in his 1936 book on the recovery problem in the United States (The Recovery Problem in the United States, obviously), and which (of course) we quote in our edition of The Formation of Capital. Jean-Baptiste Say and Adam Smith made similar noises in their day. Aristotle may even have had a few tidbits to add on the link between money and production, plus a possible comment or two about not confusing cause and effect.

Bernanke's remarks are thus a kind of "walking dead" of defunct ideas as John Quiggin put it in his book that I wish I'd stolen the title from before he published ("Cursed be he who said what I said before I said it!" — St. Jerome), Zombie Economics: How Dead Ideas Still Walk Among Us. I haven't yet had a chance to read Zombie Economics, so I don't know how insightful, intelligent, brilliant, etc. (i.e., how much he agrees with me) the author is, but it's a great description of how bankers like Bernanke and politicians like Obama have bought into the party line to such a degree that they no longer even question whether what they say makes sense. It's rather like the scene from The Ghost Breakers, starring Bob Hope and Paulette Goddard, that has what some people consider the funniest line Bob Hope ever delivered.
The bottom line is that the sooner the powers-that-be sprinkle a little salt of common sense onto their lunch (getting a Zombie to eat salt is the traditional way of breaking the spell, at least according to Haitian Voodoo priests and priestesses in the know) and start examining the claims of Capital Homesteading seriously, they are going to continue talking nonsense and, frankly, spreading hopelessness and despair.

Guy Stevenson and Dawn Brohawn contributed whatever it is you disagree with to this posting. All the good stuff is mine.

Friday, October 15, 2010

While it's obvious that we have to do so in order to keep up with the pace of modern communications, participation in the various social networks can get a little . . . wearying. For one thing, there are some participants in these groups who just can't leave well enough alone. Take, for example, the "anti-Aristotelian." This breed of buttinsky asserts that everything is relative, that there are no absolutes. Members of this group have great faith in moral relativism, and believe in it — absolutely.

Consequently, everything a moral relativist thinks, says, or does is automatically right, while everything the moral absolutist thinks, says, or does is automatically wrong. Where a moral absolutist such as Aristotle, Aquinas, Maimonides, or Ibn Khaldûn would say someone whose thoughts, words, or deeds differ from what is generally accepted as good or from known facts is ignorant, mistaken, or deluded (that is, has a false or incomplete concept of "good"), a moral relativist will instantly ascribe motives of the most absolute and depraved evil to anyone whose thoughts, words, or deeds differ substantially or even formally from his or her own.

(As a side note, by "moral absolutist" we do not mean what the moral relativist means, i.e., someone who bends others to his or her will with threats, intimidation, and force. Rather, we mean someone who believes that there are moral absolutes based on the Nature of a Creator reflected in humanity. The moral absolutist works to the best of his or her ability to discern these absolutes, adapting them and applying them to the particular circumstances of a situation.)

There is a long and complicated explanation how this sort of moral relativism galloped into western thought via the infiltration of oversimplified Manichaean dualism in the 12th century, but, since we want you to stay awake and read the news notes, we will not give it. (Buy the book when it comes out.) The reason even for mentioning all this is that we're starting to see increasingly strident assertions contradicting the position of Just Third Way adherents on such things as money and credit, banking, private property, and even social justice.

This is actually a good sign. The moral relativists, somehow dimly perceiving the inherent strength of truth, are starting to panic. Ignoring the Just Third Way hasn't made it go away. Clearly, unsupported assertions and intellectual bullying don't seem to be having any effect. The next step is to start claiming that anyone differing from the opinion(s) of the relativist Mighty Mouth (not to be confused with Mighty Mouse, champion of truth, justice, and the Muscine Way), is pure evil. We've been seeing this in politics for years — Bush is the Demiurge and Boob of Creation, a unique combination of knave and fool, yes, we know — but we're talking about the real world here, folks.

The one thing you will not see, however, is honest debate. The moral relativists learned their lesson long ago. You never go head-to-head with someone who has a clear set of principles, clearly defined and articulated. As one early encounter was described by G. K. Chesterton,

So, in his last battle and for the first time, he [Aquinas] fought as with a battle-axe. There is a ring in the words altogether beyond the almost impersonal patience he maintained in debate with so many enemies. "Behold our refutation of the error. It is not based on documents of faith, but on the reasons and statements of the philosophers themselves. If then anyone there be who, boastfully taking pride in his supposed wisdom, wishes to challenge what we have written, let him not do it in some corner nor before children who are powerless to decide on such difficult matters. Let him reply openly if he dare. He shall find me there confronting him, and not only my negligible self, but many another whose study is truth. We shall do battle with his errors or bring a cure to his ignorance." (G. K. Chesterton, St. Thomas Aquinas: The "Dumb Ox." New York: Image Books, 1956, 94.)

(We were going to put a link here to The Dumb Ox, but Amazon doesn't have any listed as being in print. We did find out that the copy we've been using that we paid $1 for is a collector's item worth almost $100, though. Maybe somebody should reprint it . . .)

One gets the distinct impression that Chesterton — if not Aquinas — considered such tactics as running away from a debate, ignoring people holding a contrary position, calumny and backbiting as somehow, well, cowardly, "not playing the game," instead of being "business as usual." G. K. was clearly out of touch with reality, at least as far as the moral relativists are concerned. (This might account for some of the unique interpretations forced on, e.g., distributism, money and credit, private property, and so on, by latter day Chestertonians intent on chaining the Chesterbelloc in the back yard as a pet, instead of roaming free in the front as a watchdog.)

It is, however, easy to understand why moral relativists tend to come across as showing the white feather (although why someone who is "yellow" is described as "showing the white feather" is a great mystery). Even if the principles or applied principles of the moral absolutist are flawed or incorrect, the mere fact that they are clear robs moral relativism of the Power of Vagueness. It becomes twice as hard for a moral relativist to engage in a debate with a moral absolutist. He or she is floored with the basic "one-two" punch of common sense.

One, the relativist gets it in the gut by first having to put together a clear argument of his or her own. That is a very painful process for the relativist or anyone else who has never learned how to think. Two, he or she takes it on the chin by having to come up with a clear and irrefutable (i.e., absolute) argument to counter that of the moral absolutist. That is contrary to his or her perception of reality. In consequence, the moral relativist has received a TKO even before stepping into the ring.

The response, then, to any invitation or attempt to engage in debate with a moral relativist causes the moral relativist to run away, usually muttering dark hints about the depraved evil of the moral absolutists, their intransigence, their stupidity, etc., etc., etc., and then shout "Ya, ya, ya!" from a presumably safe distance, or maybe — being in their own eyes completely free from sin — flinging a few ineffectual stones. A self-indulgent titter is often not considered out of place.

The global situation, however, is such that these tactics, if not moral relativism itself, are wearing a little thin. Our leaders haven't caught on yet, of course. They still act as if more of the same, only more so will solve all of our problems, State save us! They and their faithful flunkies therefore feel compelled to sneer at popular manifestations of concern, such as the Tea Party movement, and concentrate on carefully orchestrating mandatory spontaneous demonstrations of their own. They also spend a great deal of time referring to others as stupid, evil, or whatever other pejorative comes in handy.

Do we support the Tea Party? Well . . . up to a point. We support their perception that something is wrong, certainly. We are strongly in favor of smaller government, of not using taxation to engage in social engineering, and oppose the egregious misuse of the financial system, to name just a few items. What we don't see — yet — is a clear and politically viable program, such as Capital Homesteading, that has the potential to put some teeth into the legitimate outrage being expressed. So we continue working to bring the Just Third Way to the attention both of the powers-that-be, and the powers-that-want-to be. Here, in fact, is what we've been doing this week:

• Everyone here is working hard to prepare the materials for Norman Kurland's trip to China next week to take part in the Caux Roundtable on ethics in business in Beijing. You don't realize just how much material we have that would be useful on such a trip until you try and prune it down a little. • Plans are moving ahead for a new, updated edition of Capital Homesteading for Every Citizen. We hope to have the manuscript completed before Christmas.

• The CESJ Quarterly Board Meeting is tomorrow. If you have not R.S.V.P.ed by now . . . you're a little late. All responses should be sent as soon as you know you will/will not be attending or phoning in. If you want to receive a meeting notice, let us know. Keep in mind, however, that requesting a meeting notice obligates you also to let us know whether or not you will be participating, and in a timely manner.

• Guy Stevenson has put a link to Supporting Life on his facebook page. We hope that this will help the Just Third Way ideas start to go viral. • Chris O'Connor, Treasurer/Financial Secretary of the Colonel John Fitzgerald Division of the Ancient Order of Hibernians ("A.O.H.") in Arlington County, Virginia, will be submitting a review of Supporting Life to The National Hibernian Digest, the official journal of the A.O.H. The Digest claims a readership of over 60,000. Consider submitting a review to your local newspaper, member newsletter of whatever organizations you belong to, or journals and magazines. • Dawn Brohawn located an article regarding the plans of Federal Reserve Chairman Benjamin Bernanke to cure unemployment by inflating the currency. In the Keynesian paradigm, there is allegedly a tradeoff between unemployment and inflation. In the real world, all you're doing is redistributing existing wealth, which may or may not "create jobs." Since, as Moulton explained in The Formation of Capital, the real financing for most new capital formation (and thus "job creation") comes from the expansion of commercial bank credit, all that is being accomplished is stealing purchasing power from wage workers and putting it into the pockets of the already-wealthy. Yes — we have a book on this, but it's still in editing. • As of this morning, we have had visitors from 47 different countries and 47 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Australia and Brazil. People in Trinidad and Tobago, Venezuela, Lithuania, Belgium and Bangladesh spent the most average time on the blog. The most popular posting is "I Do Believe in Spooks" in the current Halloween Horror series, followed by "The New Manifest Destiny," the unpublished letter to the Wall Street Journal on the errors in the op-ed piece, "The Case for the 'Repeal Amendment'," "The New Banking Rules," and "We are Seeing the Future and It Doesn't Work."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.